China’s Economic System has Difficult Road Overcoming its Political System

It's fashionable to be bullish on China. But the new book "Can China Lead?" urges a more cautious view on the prospects of the country, where government bureaucracy stifles innovation.

by Michael Blanding

One need only look as far as the bookshelf to see the optimism attached to China's ascension as a world economic and political power. Titles like The Dragon Awakes; The Rise of China; and When China Rules the World predict an inevitable, if not entirely welcome, rise to dominance.

"If you look at those three things, you have to ask how could China not lead?"

Trouble is, the same sorts of books—and sometimes the exact same titles—beckoned book buyers at the turn of the twentieth-century as well, with entries including Rising China, The Dragon Awakes, and China Awakened. In between, China saw enormous upheaval in the Communist Revolution that firmly established the Chinese Communist Party in charge of all things political and economic.

It's not spoiling anything to say that the book answers its own question with, if not an outright no, then at least a highly qualified maybe.

Click on image to enlargeChina's growth today continues the country's strong history of commercial development. Pictured is the Bund in Shanghai, the city's financial district along the Huangpu River, in 1899.

"After people read this book, they should not be negative on China—we're not negative on China," says Harvard Business School Professor William C. Kirby, who wrote the book along with Regina M. Abrami, a former HBS professor now at the Wharton School; and F. Warren McFarlan, the HBS Albert H. Gordon Professor of Business Administration, Emeritus.

"We think the future of the Chinese economy is bright; we think the future of the Chinese people is bright; it's a very sophisticated economy with some of the most educated and most successful business people in the world," Kirby continues. "But they will only be leaders if the Chinese government steps back." He is the T. M. Chang Professor of China Studies at Harvard University and Spangler Family Professor of Business Administration at the Harvard Business School.

DOING BUSINESS IN CHINA

Kirby and his colleagues have collectively studied the country for decades, and distill the book from insights gleaned in teaching the HBS course, "Doing Business in China," the only course at the School dedicated to a single country. That's for good reason, says Kirby. "In our view, China isn't just a country, it is a fifth of mankind. And it can be a very complicated place to do business."

Since starting the course in 2007, they have collectively written more than 30 cases on business in the country, looking at all aspects of China's economy and how it will affect future MBAs.

"It's not just one country, it has multiple different economies, different types of businesses, and a whole range of opportunities," says Kirby. "Whether or not they go to China, Chinese business practices will affect their lives for the rest of their years."

In fact, China has a history of private enterprise and entrepreneurship that predates the West. "This was a freer economy in 1800 than any part of Western Europe," Kirby argues. Since the takeover by the Communist party, however, the state has been both a blessing and a curse to the economic fortunes of the county.

On the one hand, it has poured massive investment into infrastructure improvements, as anyone who has witnessed the incredible growth of mega-cities such as Shanghai and Shenzhen can see. Along with that, modern China has turned a long tradition of valuing education into some of the most outstanding modern universities of the last century. And finally, the state has recently encouraged entrepreneurship with massive investments in research and development.

"If you look at those three things, you have to ask how could China not lead?" says Kirby. "The answer is the political system. It is enabling, but it is also highly limiting—there is a glass ceiling beyond which talent can't rise."

COMPETING AGAINST THE STATE

State-owned banks exist to support state-owned enterprises, leaving private entrepreneurs to raise money from friends and family, or not at all. In many cases, in fact, the state actually hurts innovation in order to benefit the Party. Take the case of Grace Vineyard, a private winery that makes the best wine in China.

"And yet, it has to compete with state-owned enterprises that control 70 percent of the red-wine industry," says Kirby. "Why does the state dominate the wine industry? Because it is ludicrously profitable. Institutionally, you have these bottlenecks."

Oftentimes it is not the central government that is the biggest problem, but local and regional officials who may exploit foreign investment to benefit their own interests. Because of that, it's doubly important for those doing business in China to know whom they are working with and what they are getting into.

"Many people pursue business and make investments in China with the assumption that this is a massive growing market and you have to be in there. Our advice is you have to be in, but you need to do your homework first."

That means making sure you have your own people on the ground in China to oversee construction and development of your supply chain. It also means picking partners carefully—both in business and government. By the time you are relying on the legal system to settle a dispute, says Kirby, you've already lost. "No one would be well-advised to settle a commercial dispute in a Chinese court," he warns. "You're better off not wasting your time."

The savvy businessperson looking to do business in China will look for partners with whom they may be able to do business with outside China as well. Stories do exist of Chinese entrepreneurs who have overcome the limitations of the state and the Party to achieve phenomenal success—take the case of Wanxiang, whose chairman, Lu Guanqiu, began with a tractor factory in the 1960s and grew it into the largest auto parts company in the world.

Recently the company even helped bail out Detroit by investing in US auto parts companies that were going belly-up, and is becoming a leader in electric car technology.

"There are people like him all over China," says Kirby.

Their big challenges, however, are more at home than abroad. Until the Chinese state steps back and lets independent entrepreneurship flourish and grow, the country will not be in a position to lead any time soon.

Until then, argue Kirby and his colleagues, it remains for those doing business in China to seek out partners with whom they can move forward together.

About the author

Michael Blanding is a senior writer at Harvard Business School Working Knowledge.

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